Let's talk Europe

The fight for the new post-Brexit EU budget.

Did you know that Britain’s exit in March next year will deprive Brussels of some 12 billion euros from an annual budget which is now now running at approximately 140 billion euros? Europa United’s Christos Mouzeviris talks about the forthcoming EU budget and proposes changes that should benefit all involved – not without some hardship though.

That hole has already prompted some quarrelling between other net contributors who do not want to make up for any loss and the eastern European states have already stated that they should not suffer from any cuts in EU subsidies. Günther Oettinger presented the draft European Union budget for 2018 on the 30th of May, acknowledging decision-making difficulties. The Commissioner said that the draft budget had taken account of recommendations from the Parliament and the member states by increasing the amounts allocated for the Erasmus+ programme, as well as for Horizon 2020. The European Solidarity Corps, a new initiative which provides volunteering placements, trainee ships and job offers for 2-12 months, is also getting its own budget for the first time. While the EU Commission labelled it an exercise in stimulating job creation for young people, boosting growth and strategic investments, for some of the bloc’s members, things are more complicated.

East versus west?

Last February eight Eastern European members states agreed to support an increase in payments in the bloc’s next long-term budget but recently, things have turned a bit sour. The problem is that until now, the largest source of revenue in the EU’s budget is a uniform percentage levied on the gross national income (GNI) of each member country. All this is about to change due to a new styled budget but Warsaw and Budapest are expected to lose out on massive amounts of cash as Brussels proposes to move tens of billions of euros in EU funding away from central and Eastern Europe to the countries worse hit by the financial crisis such as Spain and Greece.

The aim of the plan is to support the less developed parts of the union as Brussels does not want to continue distributing cash just based on a country’s wealth or GDP. Cash given to countries will depend on different criteria such as youth unemployment, education, the environment and innovation. In addition to the above alteration of EU’s priorities, the Commission, backed by Germany, France and the EU’s other wealthy budget contributors, want to tie funding on which poorer eastern countries rely to respect for the rule of law. This could cost Hungary and Poland millions of euros.

Image source – New York Times

Poland and Hungary currently find themselves in the bad books of EU after a series of misconducts. First, it was their rebellion against the bloc’s migrant quota in order to deal with the refugee crisis and secondly, their shift to more authoritarian government and the reformation of their judiciary system did not go down very well with the majority of the EU member states. There have been many calls from European politicians to cut funds towards these two nations or even limiting some of their voting power in the Council of EU. While there is a justification in such calls, as EU membership comes with certain obligations, the danger here is from where these two countries will seek to cover the gap in their income. Poland has already hinted at allowing more US bases to settle in its territory, no doubt with further US financial support, while Hungary is known to flirt with Russian elites and influence. Can the EU push these two countries further away from its core?

By May, the prime ministers of Hungary and Poland, allies in their disputes with Brussels, are united in opposing cuts under the European Union’s new budget. The EU plan is clearly set to cut money in the 2021-2027 budget for member states that interfere in their legal systems. Poland and Hungary however, insist on protecting the interests of their farmers. These two countries are not the only ones which may be heavily affected by the new budget. Ireland’s annual contribution to the EU budget is likely to rise to over €3 billion, more than 50 percent above the current level.

Farming is the cut off point

However, the budget is framed around cuts to farming subsidies that the Irish economy is dependent on. In an effort to cut costs and promote other policies, farmers will see aid shrink in the 2021-2027 period to €365 billion, down 5 percent from the current Common Agriculture Policy budget. Something that France, by far the largest beneficiary of CAP, has already signalled their opposition to for the proposed cutbacks in farm spending. From the Irish point of view, there is a concern on contributing more if it means more funds going towards security and less on agriculture. Ireland, a country that is neutral, may have to end up spending money on European defence while at the same time cutting the backbone of its economy by the reductions to CAP. For its farmers and many of its MEPs, that is an issue.

The new CAP will look very different to the current one

It is really regretful that many countries want to hold on to what already exists. Reforms are always painful and bring challenges yet they are necessary to progress and deal with the increasing fluctuation reality that Europe finds itself in. From Brexit to the American change of foreign policy under Trump, increased security issues and immigration, a multi polar world with many emerging economies and blocs, or the assertiveness of China and Russia, Europe is faced with many challenges.

The Common Agriculture Policy has always been a great source of income for Europe’s farmers and a pillar of the European economy. Yet things are constantly changing and like everything, it has to be reformed in order to adapt. Europe cannot rely forever on agriculture.

EU policies must reflect the needs of Europe’s economy and political reality which have been changing for many decades now. Thus, we need to keep updating them. Naturally, any drastic alteration always leaves some losers while others as winners. However, this shift is necessary. We need to diversify our economy, both as individual member states and collectively as a continent in order to prepare our future generations for the world that is coming. With America becoming an unreliable partner, we have to start looking after ourselves.

Tough talk and tough love

This budget is only the beginning. As some states will lose out from CAP, the richer nations must realise that the smaller, poorer ones will need a new different type of funds and support in order to keep their economy thriving by investing directly in these states.

Thus, a further integration of the European economy is a much needed solution. While rich member states like Germany oppose and block this development, there will come a day when even they won’t be able to stop it unless they are ready to see the disintegration or further fragmentation of the block.

The best way to deal with disobedient member states like Hungary and Poland or weaker economies like the Greek and Irish, or French over-reliance on CAP is to further modernise, diversify and harmonise the European economy. If everyone has a secure flow of investments to achieve this, the quarrelling will soothe out while in addition there will be less foreign interference in EU as there will be a lesser need for third-party cash. In other words, if every EU member state is wealthy and has a stable economy, the more engaged and committed it will be with the bloc and its requirements – in theory at least.

Inequality on financial terms, protectionism within Europe, conservatism and petty nationalism will have to give way for the greater good of the continent in order to achieve collectively bigger achievements. European countries must finally decide which direction they want to follow and this budget hints of hopeful changes.

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I was looking at the €12bn figure recently, it does not square with the figures that looking at the UK’s contribution creates. The most recent figures are 2016 when the UK paid in £13.1 billion to the EU with spending on the UK around £4.5 billion. Thus the UK’s net contribution was estimated at about £8.6bn. That is to say, the real ‘bill’ is around €19.3bn, but there is a €4.55bn rebate, €14.8bn is what they paid in in 2016, then the EU spent nearly €5.7bn on the public sector with an unknown amount of extra funding going to the private sector. There are also other grants and funds, smaller but adding up to amount to what the UK gets back being almost a net gain. Look at it that way and then look at the €12bn again.
It appears to be a good example of accountants balancing books to show everybody needs to pay higher prices for what is on offer based on the gross figure rather than sharing the real difference. Bearing in mind that net income is the residual amount of earnings after all expenses have been deducted from selling a product and gross income is the intermediate figure before all expenses are included but here EU accounts are looking at net income as the final amount before rebates and funding are included the €12bn seems to be exaggerated.
I am neither an accountant nor competent in any financial matter but have a comprehensive understanding of economics. Thus, it looks to me like politicians with responsibility for finance and their civil servants are making a mountain of a financial molehill to make a point. Yes, there will be a deficit caused by withdrawal from the pot, but never the notional €19.3bn that has never really been the case. It is a useful tool for political economic excuse making. The real difference spread proportionally to national economic means will always be offset by the increased proportion that is rebated to the less well off member states, plus the funding and subsidies they receive anyway. Brexit seems to be everybody’s favourite excuse for making an excuse.
The solution is clear, well perhaps, that the first step toward a federal structure that has often been proposed is fiscal union, but that needs to be matched by financial parity that is overseen by a formally structured ‘federal ministry of finance and economics’. If there is one thing to thank Brexit for, it is that Thatcher’s rebate deal taught EU accountants how to cook the books, now it is time to put those books back in order.